Final regs. issued on Killer B transactions.

• Author: Hanson, Kristin N.

On May 19, 2011, the IRS issued final regulations under Sec. 367(b) to close a loophole that allowed one or more foreign corporations involved in a triangular reorganization to repatriate earnings tax free to the United States in certain circumstances (T.D. 9526). These transactions are often referred to as "Killer B" transactions. The final regulations primarily adopt the proposed regulations that were published in May 2008 and are effective for all transactions occurring on or after May 17,2011.

History

In 2006, the IRS issued Notice 2006-85, which initially announced the IRS's plan to issue regulations that would address Killer B transactions. A year later, the IRS issued Notice 2007-48 to expand the scope of Notice 2006-85. In a Killer B transaction, the parent company stock is used to purchase the stock or assets of a target. It was used as a way to repatriate foreign earnings without subjecting the U.S. parent company to any U.S. tax on the transaction.

Example: U.S. parent company USP owns 100% of USSub, a U.S. subsidiary, and 100% of controlled foreign corporation CFC1. USSub owns 100% of CFC2, another controlled foreign corporation. In the transaction, CFCI buys parent stock from USP for cash. CFC1 then exchanges the parent stock with USSub for the stock or property of CFC2 in a transaction qualifying as a triangular reorganization under Sec. 368(a). CFC1 now owns the stock or assets of CFC2, and USSub owns the parent stock. In this transaction, taxpayers took the position that the transaction qualified as a triangular reorganization under Sec. 368(a) and that under Sec. 1032 the parent company should recognize no gain or loss on the receipt of the cash in exchange for its stock. CF CI does not recognize any gain or loss on the exchange because the basis and the fair market value of the stock are the same.

In the next step of the transaction, CFC1 transfers the USP stock to USSub in exchange for the stock or assets of the target, CFC2. Generally, under Sec. 1248, if a U.S. person sells or exchanges stock in a foreign corporation and that person owns 10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation at any time during the five-year period ending on the date of the sale or exchange when that foreign corporation was a controlled foreign corporation, the gain recognized on the sale or exchange of such stock will be included in the gross income of the U.S. seller as a...